Historic re-developers across the state are concerned about the end of the tax credit
Published Friday, October 21, 2022 at 6:11 p.m
By Dan Cracker
A century ago, the granite facade of a certain building in Duluth was the last place most people wanted to see.
“We’re looking at a pretty imposing former prison property building,” said Jon Commers, standing in front of the old St. Louis County Jail built in the early 1920s. It’s tucked behind the county and federal courthouses in downtown from Duluth.
Commers is one of three developers transforming the building into 33 mixed-income apartments that he hopes people will want to call home.
Inside, workers are busy painting and putting the finishing touches on the building. Commers points to terrazzo floors in the lobby, detailed plasterwork, and decorative designs on the tops of columns.
“The craftsmanship involved is truly extraordinary,” he said. “You have decorative elements that, you know, [are] just very striking.”
And other, more prison-like elements remain. In one of the apartments, Commers points to a row of bars between the kitchen and living area.
“That part will be preserved,” he said. “Many of the units will have some remnants of bars, or as you can see, some mechanical elements of the blocks.”
Commers compares retrofitting the prison – which sat empty for about 25 years and was almost demolished for a parking lot – to playing a game of Jenga.
The contractors found out that the old cell blocks actually supported the construction. So they had to replace many of them with steel beams. Adding to the challenge was the building’s coat of old lead paint that had to be removed.
All told, the project cost just over $11 million.
About a third of those costs are covered by state and federal historic tax credits. Without those credits, says Commers, the project would not have happened.
“There is no ambiguity about that. It simply wouldn’t be feasible to achieve without both state and federal historic tax credits,” he said. “The kind of demands that come with a project like this just requires that kind of capital injection to make it viable.”
Just a few blocks away, construction began last month on a nearly $30 million project to restore and convert Duluth’s historic Central High School. Built of Lake Superior sandstone, with its signature bell tower, it will contain 122 residential apartments.
But more potential projects like this in the state are in limbo due to the state’s historic rehabilitation tax credit expiring at the end of June.
A powerful tool for restoration
That credit offers property developers a 20 percent income tax credit and parallels a comparable federal credit. It has helped restore more than 170 historic buildings in the state since its inception about a decade ago.
Minnesota is one of more than 30 states that offer their own credits to supplement what is offered by the federal program.
“Before state credit was implemented, only one or two historic buildings were restored in any given year,” says developer and consultant Meghan Elliott.
In the last year before the project ended, 34 projects were approved as developers scrambled to take advantage of the program. “They recognize how powerful this tool is to make these projects a reality. And we’ve just had a deluge of applications in the state of Minnesota,” Elliott said.
Elliott is another developer of the Duluth prison project and co-founder of the group Revitalize MN. She says the credit recognizes that there is a lot of value in restoring historic buildings that the market is not recognizing. Take the prison project in Duluth.
“It’s built with 280 tons of steel and granite from Rockville, Minnesota,” Elliott said. “There’s no way you can overcome that lost embedded energy and carbon if you dump that building.”
In addition to the environmental benefits and helping restore the city’s historic legacy, proponents say the credit also creates jobs.
“For every dollar spent on a recycling project, you’re spending that money on people in jobs rather than on materials,” Elliott said.
A recent analysis by the University of Minnesota found that credit generated an estimated $5 billion in economic activity over 10 years.
But it’s also expensive. In the program’s last year, it cost the state nearly $125 million in tax revenue.
hopes an extension
DFL state representative Cheryl Youakim of Hopkins sponsored a bill to extend the credit last session.
“There is always a cost to a tax cut and every time you do a tax cut. That takes cash, and there’s a lot of need for it,’ Youakim said. “And sometimes this one doesn’t always float to the top.”
Still, Youakim said the credit has bipartisan support. It was included in the tax law that lawmakers negotiated at the last session. But the deal died in battle over other bills.
GOP state senator Carla Nelson of Rochester, who chairs the Senate tax committee, said she is hopeful that lawmakers will extend the appropriation next year and also remove the lapse clause. She calls it “a gem” for the state.
“This is something that shouldn’t be controversial at all. It hasn’t been controversial. It works. And it works statewide,” Nelson said.
If it is not reinstated during the next legislature, several projects in the state are at risk.
One of these is the planned $90 million conversion of Landmark Tower in downtown St. Paul to 186 apartments.
The project is simply “not viable” without the state’s historic tax credit, developer Chris Sherman said.
Sherman is president of Sherman Associates, which has used the credit to develop a number of high-profile projects in the state, including the restoration of Duluth’s historic NorShor Theater.
Sherman said credit is an especially important tool given the changes the pandemic has brought to real estate.
“We have a lot of buildings that have changed use over the past two years due to a pandemic,” Sherman said.
“And the state’s historic tax credit, just as it was 12 to 13 years ago, can be a catalyst for building remodeling, it can be a catalyst for maintaining construction jobs, and it can be a catalyst for building a long-term tax base for the city and state.”
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